FHA 203k procedure
The chart to the right is very simplified but we will fill it in a bit as we go forward.
A home buyer may enter the chart at any point, their landlord may come to them one day and ask if they want to buy the home... but then they would go back to "square one" and contact a lender to see what amount they might qualify.
In reality we might suggest contacting a consultant first and we could help you find a lender that knows the business but more importantly fits the needs of our client best. We will find out what is more important to that client then go from there.
Under normal circumstance you might meet with a Realtor then be redirected back to get a "pre-qual" letter which is typically presented with the offer to show that the borrower has started that process.
Meet with the 203K consultant. This is more than just meeting this is a consultation. Your FHA 203K consultant will make the compliance inspection and with the clients assistance in their knowledge of the minimum property standards that will come up with a scope of work that would be the basis of their 203K project.
Once the borrower/client and consultant arrive at a proper scope of work this can be set out to bid. Once the contractor bid validates the consultant's bid the paperwork can be sent to the lender. Once this scope of work is been transformed into the HUD format called "a work write up" and validated by a contractor the lender can order the appraisal.
The appraiser will conduct a inspection of the home, review the scope of work, and create a estimate of value based on the work being completed. It is a misnomer to assume there are two appraisals needed this is not true.
Originally the guideline bid state that two appraisals were needed, and on HUD homes, that is HUD foreclosed homes they will come with an appraisal that satisfies the need for an as is appraisal. Years ago, I believe 1995, it was agreed that an after improved value appraisal, or as repaired appraisal, is all that's needed and in the side that appraisal could be a comment about the as is value. The as is value might be the after improved value minus the cost to cure. The cost to cure is just another way of saying the cost of the repairs.
Once the appraisal is completed there are two likely outcomes. 1) the appraisal comes in at value, no problems, and the loan can be closed. This is the outcome we like to see most often. 2) the appraisal comes in below value. Once the appraisal comes in below value it has to be reviewed. If I'm asked to review it, the first thing I look for us to see how low it came in. If it came in less than 10% low, nothing needs to be done to it. Under the FHA 203k loan guarantee program the lender can make the loan up to 110% of the of appraised "value after the improvements are made".
If that appraised value came in more than 10% low then we will look for errors in the appraisal. If there are none found, which is quite often the case, we have two choices. 1) your agent may renegotiate purchase price. If that's not possible, then your choice is 2) find another property to purchase.